"UK food groups are at risk of losing out in the consolidation of the industry impending in continental Europe and the US," he said, citing the proposed pounds 1.4bn merger of Kwik Save and Somerfield as further evidence of pressures in the sector. The danger is that the profits of Tesco and Sainsbury, as well as Safeway, face a squeeze at a point when it is already almost too late for the supermarket chains to build up their operations abroad.
In 1993 the UK chains led Europe in terms of capitalisation. The market value of the UK's big four stood at pounds 20.4bn, while the value of the French big four was pounds 5.1bn. Over the past five years the French have closed the gap. As of Thursday the capitalisation of the UK big four was pounds 30.4bn; that of the French, pounds 23.2bn.
The same picture of the French outstripping the British holds for pre- tax earnings. In 1993 the UK big four reported pounds 1.9bn, while their French counterparts reported pounds 2.3bn. In 1997 the UK giants reported pounds 2.3bn, while their French equivalents reported pounds 7.1bn. The consensus forecast is that UK supermarkets will grow 5-10 per cent annually in the medium term, while on the continent food group profits will grow 15-20 per cent a year.
Mr George blames managements for the relative decline of the UK supermarkets. "They thought they were the best in the world," he said. "They went abroad, did not pay attention to local managements, and tried to set up British versions of supermarkets. It hasn't worked."
He offers Tesco's pounds 150m purchase of France's Catteau as an example. "Catteau was a family-owned concern," he said. "When Tesco came in, most of the family - which had succeeded by getting the best terms from food manufacturers - went. Tesco had to put in a management structure to fill the void. That was costly and less effective."
He also compares Sainsbury's Boston, Massachusetts-based US unit, Shaw's, with the New England Stop 'n' Shop chain owned by the Dutch group Ahold. "Ahold left the American management in place," Mr George said, "Sainsbury much less so."
The Paribas analyst also blames the City for the failure of UK supermarkets to extend their reach abroad in time to position themselves for the international consolidation in their sector. "Investors on the continent take a longer- term view," he said.
He cites financial factors for the decline of the UK supermarket groups. Over the past decade the chains have focused on investment at home in a race to dominate a saturated market. "They have opened 10-15 new stores a year. Land is more expensive than on the continent, and the infrastructure of our stores is of a higher quality."
The fact that the new stores generated decent profits blinded owners to the need to build up operations abroad, Mr George said. But as a result of domestic investment, net borrowings have risen. Sainsbury has a gearing of 40 per cent, Tesco 29 per cent, Safeway 22 per cent. This leaves them poorly positioned to make overseas acquisitions now.
Mr George sees UK supermarkets profiting from moves into banking and home shopping. But for now, the investment is another barrier to buying abroad.
"We are downgrading our weightings in the UK food retail sector from neutral to underweight despite the potential for some consolidation among the smaller groups," Mr George said. "We are downgrading Sainsbury from buy to no action and Safeway from no action to sell."Reuse content